Why LinkedIn Bears Like Haverty Say Plunge Is Inevitable

LinkedIn Corp., the hottest initial public offering in the U.S. since at least 2006, may not be growing fast enough to justify its valuation.

The stock should trade 60 percent below yesterday’s close of $88.30, based on a forecast for earnings before interest, taxes, depreciation and amortization of $104 million in 2012, said Lawrence Haverty of Gamco Investors Inc. The shares, which traded as high as 31 times annual sales, are benefiting from scarcity that won’t last, said Haverty, Kevin Shacknofsky of Alpine Mutual Funds and Brian Barish of Cambiar Investors LLC.

Surging demand for social-media stock and a comeback in venture-capital IPOs propelled LinkedIn to a high of $122.70 in its first day of trading from an initial price of $45. With a market value of $8.45 billion, the company must boost revenue by 148 percent a year, twice its growth rate since 2009, to bring its price-sales ratio in line with the Dow Jones Internet Services Index by 2013, Bloomberg data show.

“This is not something we even consider investing in,” said Haverty, who helps oversee $35 billion in Rye, New York. “This is a sideshow. It’s a magic show,” he said. “The only question for the investor is how soon they should sell.”

Supply and Demand

More than 30 million shares of Mountain View, California-based LinkedIn changed hands on May 19, the first day of trading, 3.8 times the amount sold to the public. That’s the biggest difference between supply and demand in at least five years for an IPO of a U.S.-based company, according to data compiled by Bloomberg.

LinkedIn sold 7.84 million shares on May 18. About 85.7 million shares owned by insiders and money managers start to become eligible for trading 180 days after the IPO, regulatory filings show. Social media companies led by Facebook Inc. and Twitter Inc. may conduct their own share sales.

Hani Durzy, a spokesman for LinkedIn, didn’t return a call for comment.

“There’s no way you can justify its valuation,” said Shacknofsky, who helps manage $7 billion in Purchase, New York, for Alpine, which invested in the IPO and sold the shares on the first trading day. “It’s very difficult to understand its valuation. It’s trading on short supply because it wasn’t a big offering to begin with, and a lot of people who wanted exposure to a quality social-networking play bought it.”

Wage Increases

The company’s ability to translate revenue to cash will be hurt by wage increases, Haverty said. LinkedIn is probably able to convert about 15 percent of its sales into Ebitda, and may generate $680 million in revenue next year, he said. Based on that, the stock is worth about $30 to $35, he said. The shares advanced 0.4 percent to $88.62 at 11:05 a.m. in Frankfurt trading today.

Sales in 2011 will reach $375.7 million should its first- quarter total be replicated through the end of the year, data compiled by Bloomberg show. That’s up from $120.1 million in 2009 for a compound annual growth rate of 76 percent, the data show.

To bring its price-sales ratio in line with the Dow Jones Internet Services Index multiple of 3.7, LinkedIn would have to produce revenue of $2.3 billion. Reducing its multiple from 22 now to that level by 2013 would require an annual growth rate of 148 percent, according to data compiled by Bloomberg.

‘Artificial Price’

“The winds are blowing against this thing being worth $9 or $10 billion,” said Haverty. “Wall Street has created an artificial price because they didn’t release that many shares. They underestimated the demand. This happened all the time during what we now affectionately call the bubble period” of the late 1990s, he said.

Former U.S. Treasury Secretary Lawrence Summers said technology stock valuations may be approaching a bubble as investors recover from the collapse of the credit markets.

“Who could have imagined that the concern with respect to any American financial asset, just two years after the crisis, would be a bubble?” Summers, now a professor at Harvard University, said at a conference last week in Shanghai. “Yet that concern is increasingly raised with respect to American technology, with respect to certain other American assets.”

While LinkedIn trades for a higher price-to-sales ratio than its peers, it’s also growing faster. LinkedIn’s valuation of 22 times sales compares with an average of 9.2 times estimated 2011 revenue at Web business software companies Salesforce.com Inc., SuccessFactors Inc. and NetSuite Inc. LinkedIn’s sales more than doubled in the first quarter to $93.9 million. Revenue at the other three increased by an average of 35 percent.

IPO Buzz

“The IPO buzz will likely help their operations in the near term” and support the stock’s valuation, according to Clay Moran, a Boca Raton, Florida-based analyst at Benchmark Co., a research firm. “Companies also typically tend to have strong earnings in the first quarter after an IPO, which may help bolster the price.”

LinkedIn’s backers had made more than $100 million in investments in the company since 2003 at the time of the IPO. After the first day of trading, Sequoia Capital’s stake was worth $1.59 billion, and Greylock Partners’ $1.32 billion. Reid Hoffman, LinkedIn’s founder and chairman and its biggest shareholder, held $1.8 billion and Bessemer Venture Partners has a stake worth $431.5 million.

Venture Capital Backers

About 62 percent of the shares in the offering were sold by LinkedIn, according to the prospectus. Others included a venture capital affiliate of Bain Capital LLC, McGraw-Hill Cos., Goldman Sachs Group Inc. and Hoffman. Venture capital backers Sequoia Capital, Greylock Partners and Bessemer Venture Partners aren’t selling shares, according to the filing.

LinkedIn raised the proposed price range for its initial offering on May 17, to between $42 and $45 a share, from $32 to $35. The stock traded at $35 a share in March, compared with $14.50 in April 2010, according to SecondMarket Inc., the New York-based exchange that helps owners of stock in closely held firms look for buyers.

“It happened in the late 1990s quite often, where you have these stocks that are essentially concept stocks,” said Barish, who oversees $8 billion as president of Denver-based Cambiar. His Cambiar Aggressive Value Fund beat 99 percent of peers in the past year with a 65 percent return. “The problem is there’s so little operating history. You have absolutely no idea what these businesses are going to look like in a couple of years.”

LinkedIn Corp., the hottest initial public offering in the U.S. since at least 2006, may not be growing fast enough to justify its valuation.
The stock should trade 60 percent below yesterday s close of $88.30, based on a forecast for earnings before interest, taxes,...